The merits of fiscal discipline

The UAE has many economic laws and regulations that deal with investor rights and guarantees property rights such as arbitration, insolvency and corporate laws.

The IMF expects the UAE's overall GDP growth to register 2.5 per cent in 2020/Bloomberg

by Kudakwashe Muzoriwa

While the UAE has been steadily diversifying its economy through the increase of foreign direct investment (FDI), oil remains the country’s primary source of revenues. Any volatility in the global markets and the oil industry could dampen investor confidence and aﬀect the country’s economic performance.

Fortunately, the UAE is bucking the negative trends in global markets and economic analysts remain optimistic about the country’s growth in 2020. The International Monetary Fund (IMF) said that following a challenging period, the UAE economy is recovering, and non-oil growth could pick up to around three per cent next year—the fastest since 2016—on the back of Expo 2020 Dubai and fiscal stimulus.

The IMF projected overall GDP growth to register 2.5 per cent in 2020. Moody’s also affirmed its Aa2 issuer rating of the UAE, which is supported by the full backing of the government of Abu Dhabi and the federal government’s strong balance sheet.

Moody’s said that its credit view of the UAE reflects a very high economic strength with exceptionally high GDP per capita, a very large hydrocarbon endowment as well as strong growth rates and a return to consolidated UAE budget surpluses. The UAE has a slightly better public debt outlook compared to its Arabian Gulf allies.

The implementation of fiscal consolidation measures to nurture the growth of the non-oil private sector, including SMEs and developing transparent rules-based fiscal frameworks will support long-term sustainability, said the IMF. According to analysts since 2014, lower oil prices have prompted GCC governments to launch fiscal consolidation programmes spending cuts, energy price reforms and economic diversification measures.

FISCALLY FITTER

The UAE Cabinet approved a zero-deficit federal budget of AED 61.35 billion for 2020 and the budget is the largest allocation since the establishment of the country. The Ministry of Finance (MoF) stated that the budget is distributed amongst various sectors related to Emirati citizens and their services such as 31 per cent for social development, 14 per cent for infrastructure and economic resources as well as 6.5 per cent for social benefits and 32.6 per cent for government affairs.

In September 2019, the Financial and Economic Committee approved a two per cent increase for the 2020 federal budget on top of the AED 60.3 billion the government had allocated for 2019. The budget was increased more than 300 times since the allocation of the first budget in 1971 and has been without a deficit for the third consecutive year, reflecting the strength of the national economy and the country’s abundant financial resources that can fund economic development projects.

EXPO 2020 DUBAI

The World Bank said that growth in the UAE is expected to reach three per cent in 2020 and 3.2 per cent in 2021, spurred by hosting World Expo in 2020 as well as Dubai and Abu Dhabi’s implementation of economic stimulus plans announced in 2018.

Expo 2020 Dubai, for which the Dubai government allocated $7 billion for infrastructure construction, is expected to draw large numbers of international visitors from 132 participant countries which should boost both private consumption and services exports next year.

According to EY’s The Economic Impact of Expo 2020 Dubai report, “Expo 2020 Dubai and its legacy are expected to contribute AED 122.6 billion of gross value added to the UAE’s economy from 2013–31 as well as support up to 905,200 full-time equivalent (FTE) job-years, which is equal to approximately 49,700 FTE jobs per annum.”

In the legacy period from May 2021 to December 2031, the Dubai Expo site is expected to be redeveloped to District 2020, which is expected to include tenant companies and an expanded Dubai Exhibition Centre (DEC).

District 2020 has been planned to support the UAE’s future vision by supporting sustainable economic development, moving toward an innovation-driven economy and creating a business environment to help support key growth industries such as logistics and transport, travel and tourism, construction and real estate and education.

STRUCTURAL REFORMS

The introduction of a five per cent value-added tax (VAT) in 2018 was a historic milestone; and, while it might encourage consumers to fasten their wallets in the short-term, it is expected to substantially strengthen and diversify government revenues in the coming years.

According to Moody’s revenues from the UAE’s VAT exceeded government expectations in 2018, boosting state coffers and proving credit positive for the country. The rating agency stated that the robust level of compliance in the first year is a positive reinforcement of the UAE’s high institutional strength.

The UAE government has been supportive of economic diversification through the enactment of laws and regulations that seek to boost FDI as well as the participation of the SMEs, the sector which represents more than 94 per cent of the total number of companies operating in the country.

In 2018, the President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan issued an array of new investment laws, a move which is expected to boost and retain foreign investment for the country to lead Global FDI by 2071.

“The authorities have already taken a number of important steps, including adopting a foreign direct investment (FDI) law allowing 100 per cent foreign ownership in selected sectors and reducing or eliminating fees and penalties,” said PwC.

The Cabinet approved 13 sectors eligible for up to 100 per cent foreign ownership such as manufacturing, agriculture and renewable energy in July 2019. The cabinet also approved 122 economic activities across 13 sectors eligible for total foreign ownership.

Other sectors and activities where up to 100 per cent foreign ownership will be permitted including space, transportation as well as hospitality and professional, scientific and technical activities. Similarly, local governments at the emirate level are to determine how much foreign investors can own in each activity allowing different foreign ownership limits to be applied among the seven emirates.

Moreover, the UAE’s long-term visa system, which was launched in November 2018, is aimed at facilitating business, and creating an attractive and encouraging investment environment for the growth of business for investors, entrepreneurs and professional talents. The long-term visa will be awarded to investors, entrepreneurs as well as specialised talents and researchers in the fields of science, knowledge and outstanding students.

The UAE has many economic laws and regulations that deal with investor rights and guarantees property rights such as arbitration, insolvency and corporate laws. PwC said that the UAE’s bankruptcy law contributes to raising the level of credit and financial security in the country by enhancing investor confidence.

The bankruptcy and insolvency laws are aimed at stimulating the country’s economy by allowing people in financial difficulty to reorganise their financial affairs and repay their debts.

The new insolvency law and regulations for companies operating in Dubai International Financial Centre, which was enacted by Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, came into effect in August 2019. The new insolvency law provides for a new administration process where there is evidence of mismanagement or misconduct.

Similarly, the law also enhances the rules governing winding-up procedures; and incorporates the UNCITRAL Model Law on cross border insolvency proceedings with certain modifications for application in the centre.

BOLSTERING THE COFFERS

Moody’s said that the outlook for the UAE’s banking system remains stable as banks’ credit profiles remain resilient in a stable but subdued economy.

The GCC financial services industry is witnessing a wave of consolidation as banks seek ways to improve competitiveness and boost capital amid slowing economic growth. Scale and competitive edge are among other reasons behind mergers and acquisitions in the banking sector in the UAE.

The need for mergers is pressing given the slowing global economic growth battering emerging markets in the wake of a prolonged US-China trade war, said Fitch Ratings. Last year, the Abu Dhabi Government merged three banks creating a banking group with AED 423 billion in assets.

The UAE’s plans to allow foreigners to own 100 per cent of businesses across industries in July 2019 was welcomed by the country’s banking sector. As the government eases rules to attract foreign direct investment, the boards of First Abu Dhabi Bank, Emirates NBD and Abu Dhabi Islamic Bank plan to open up to more foreign shareholders. Previously, the UAE capped foreign ownership of businesses at 49 per cent, except in economic free zones.

INVESTING IN THE FUTURE

The UAE’s economic diversification strategy is also being spearheaded by Mubadala Investment Company and Abu Dhabi National Oil Company (ADNOC) who are spending on large infrastructure projects—a move which is expected to have positive spillover effects on the private sector. In 2019, Abu Dhabi’s Mubadala invested a total of AED 70.1 billion of additional and recycled capital across its existing investment sectors including technology, aerospace as well as commodities and financial services in line with the UAE’s efforts to diversify its economy.

The state investor together with Microsoft and SoftBank Group launched Hub71, an AED 520 million initiative which seeks to support high tech start-ups. Mubadala also unveiled AED 918 million ($250 million) MENA-focused tech investment funds in October 2019 to support start-ups in the Gulf region while empowering tech talent in the UAE and across the wider Middle East region.

The new MENA tech funds will invest in companies and venture funds that help boost UAE’s Hub71—a tech incubator which was launched earlier this year as part of a broader effort by the government to diversify the economy.

Similarly, ADNOC is seeking to bring in outside investors to take a minority interest in its gas pipeline network. According to the Institute of International Finance (IIF), the UAE is among Arabian Gulf oil producers that are deploying their energy riches as a magnet for fresh capital.

The state-owned energy giant—already raised funds by leasing out crude pipelines and listing shares in its service stations business—is lining up partners to boost gas output and expand refining and chemical operations.

ADNOC raised $4.9 billion from investors including KKR & Co., BlackRock as well as Singapore sovereign wealth fund, GIC, and the Abu Dhabi Retirement Pensions and Benefits Fund (ADRPBF) through selling an interest in its oil pipeline business. The UAE is expected to stage a modest recovery in 2020 and keep up the momentum through 2021.

Abu Dhabi's three-year stimulus package and Dubai's infrastructure spending linked to World Expo 2020 is set to support the non-hydrocarbon real GDP growth which is expected to reach 2.2 per cent in 2020.

The real estate sector hasn't been doing since 2016, however, the launch of the Supreme Committee for Real Estate Planning in Dubai is expected to balance supply and demand. As the leading regional destination of FDI inflows, the UAE government aims to achieve even higher FDI inflows, setting a target of five per cent of GDP for 2021.

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